Most personal finance blogs will tell you that savings is the most important factor in becoming wealthy, which is true right, if you don’t save; you simply cannot increase your net worth, which is a lose/lose situation. However, is savings the answer to abundant wealth? Lets take a look at what saving over a lifetime looks like, and whether its most important to grow your wealth.
Lets say that you are able to make $50k per year but you can never increase your income past that, and you focus on saving $25k every year. That’s a lot of money right! With that savings rate you will save $1 million over the course of 20 years, that’s not bad right? And you’ll likely have more than $1 million in 20 years if you are investing throughout that time.
On the other hand lets say you are someone who is able to increase your income year over year, and you go from making $50kper year to making $1 million a year over the course of 20 years (making $1 million by the 19th year). However, lets say that your spending goes up each year with that increase in income, so that each year are only able to save $25k. You may think this is unlikely, but there are people out there making $1 million per year, but spending all of their income on their mansion, fancy cars, vacations, college funds and so forth. Now, hopefully the important relationship between savings and income can be seen.
Bottom Line
The bottom line is that the two do not work without each other. In my opinion, the main focus should be built on increasing your income, because it is more difficult to do than saving. Think about it, anyone intelligent enough can think to save; you simply make sure to pay low relative rent (relative to income), and be diligent about your spending on food, clothes, and discretionary items.
Increasing your income, difficult?
Increasing your income can be relatively difficult to do, as it does not involve a simple process, and there are many factors outside of your control at play. For instance, lets say you are working as an associate at your company, and you see that the Vice Presidents there are making triple the income that you are, of course you would like to be making their salary. Now, unlike making the decision to lower your rent, in order to increase your income in this situation you will need to consistently out-perform and compete in order to receive a promotion in a few years, so it is not something you can decide on in a day. This will take persistence and long-term effort.
What’s the Answer Then
In terms of building wealth, it is essential that you simultaneously work on both of these skills, with a sharp focus towards income acceleration. Take the first easy step by finding a decent place to rent that is cost effective relative to your current income. Then keep your costs at that level, while focusing extremely hard on increasing your income. If you start increasing your income, but also increase your spending, things will not work out.
What you do you think is more important? Saving or increasing your income?
